Companies HD and LD have the same tax rate, sales, total assets, and basic earni

Question

Companies HD and LD have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Both firms finance using only debt and common equity and total assets equal total invested capital. Company HD has a higher total debt to total invested capital ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?

a. Company HD has a lower equity multiplier.

b. Company HD has more net income.

c. Company HD pays more in taxes.

d. Company HD has a lower ROE.

e. Company HD has a lower times-interest-earned (TIE) ratio.

Explanation / Answer

a. Company HD has a lower equity multiplier compare to Ld

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